On The U.S. Debt Ceiling
The U.S. Treasury announced that it has reached the national debt limit. The debt limit—commonly called the debt ceiling—is the maximum amount of debt that the Department of the Treasury can issue to the public or to other federal agencies. To prevent the United States from defaulting on its payment obligations, the Treasury will now be forced to utilize its cash balances and take steps towards “extraordinary measures.” The precise timing of when the Treasury will exhaust its available cash and borrowing capacity is still unclear.
Despite the looming deadline, Treasury Secretary Janet Yellen stated that “It is unlikely that cash and extraordinary measures will be exhausted before early June.” Early market estimates for the date window are slightly farther out, ranging from July through early-November.
Historically, Congress has proven that this issue is not an easy one to resolve. The legislative process to raise or re-suspend the debt limit has not and will not be swift, perhaps not seeing resolution until very close to the last minute. A divided Congress and the assumption that Republican members of the House will use the debt limit as a means for other concessions, increases the probability of a protracted debate.
All that being said, it’s important to note that prior debt limit episodes have never resulted in a default by the U.S. Treasury—however, the uncertainty associated with politics can induce both market volatility and investor anxiety. In the unlikely event that a political resolution is not reached in time, we believe the Treasury would take steps to prioritize the payment of principal and interest on U.S. Treasury securities over other required federal payments. Even if payment were ultimately delayed on a Treasury security, the bonds could continue to trade in the secondary market.
We do not expect a quick resolution to the debt limit question, but we do expect it to be resolved in time to avert default. We do not anticipate a downgrade or watch listing of the U.S. government’s credit rating, but a prolonged debate could be of concern to the rating agencies. As in prior debt limit episodes, we will take steps to position the funds around potential volatility.